Editorial: Two battles on the horizon

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Posted on March 28, 2013 |

In the ongoing budget battle in Montpelier, Gov. Peter Shumlin’s pitch to avoid higher taxes resonates with the average Vermont voter and Main Street businesses, while Speaker of the House Shap Smith has the political muscle of the House (and the support of a host of lobbying groups representing the low-income population) on his side to support a package of tax increases to balance the budget.

How the Vermont Senate responds to the dueling budget proposals will play out over the next few weeks with one certain impact: a compromising voice that favors aspects of both sides while panning others. It is an established process, always with variables that keep the dance interesting.

The most recent drama has focused on increased taxes. The governor’s budget held most taxes steady, with two exceptions: what appears to be a unanimous agreement between the administration and Legislature to raise the gasoline tax by 6.7 cents this year to avoid losing a $56 million federal match, followed by an additional 7 cent hike next year — all of which would be used for road and bridge construction and repair; and a proposed tax on break-open tickets that the governor initially predicted could raise $17 million, but now appears will raise just less than $7 million. The governor’s budget proposal, nonetheless, increased General Fund spending by 5.8 percent over last year, including adding 79 new positions to state government.

The House proposal spends less and puts more in reserve. It raises spending by 4.7 percent, and puts $7 million back into state reserves or rainy day funds, while creating 62 new state positions. In total, the proposed House budget raises $23 million in tax increases for the General Fund in fiscal year 2014. Those taxes include: a 50-cent hike on a pack of cigarettes (raising it to $3.12 from the current $2.62); adding a 0.5 percent hike on meals for one year; removing the sales tax exemption for soda, candy, vitamins, supplements, bottled water and clothing purchases of $110 or more; and collapsing the top two income tax brackets into one and charging the higher rate. The House also approved $4 million in new taxes for the Education Fund.

That’s the thumbnail background.

Here’s where we think two upcoming battles might be fought:

• Taxing the wealthy:

The House membership is more progressive than not. When push comes to shove, they would rather tax the rich than cut benefits to the poor, or even shift benefits from one progressive program to another. The counter will be evidence that taxing the wealthy few has its limits, and could drive wealthy taxpayers out of state, thus lowering revenues.

A chart created by the Vermont Department of Taxes for 2011 Vermont Personal Income Taxes shows that only 1,217 filers earned more than $500,000. Those 1,217 taxpayers (0.39 percent of all income tax filers, less than half of 1 percent) paid 20.33 percent of all state income taxes.

On the other end of the spectrum, 125,523 Vermont filers reported earnings of less than $25,000 and paid 2.3 percent of income taxes collected. That group represented 40.13 percent of all filers.

The next group, those earning between $25,000 and $50,000, were made up of 76,927 filers (24.79 percent of all filers) who paid 10 percent of all income taxes. There were 71,910 filers (23 percent) earning between $50,000 and $100,000 and paying 24.7 percent of total income taxes; and 35,688 filers who earned between $100,000 and $500,000 (11.5 percent of filers) who earned 33.65 percent of total income and paid 42.57 percent of the state’s income taxes. Roughly 350 filers, we were told, make over $1 million annually.

What the above information makes clear is that Vermont’s income tax is already very progressive. When less than 12 percent of all filers — those who earn above $100,000 — pay for 62.9 percent of the state’s income tax, that favors the low-income population.

So, here’s the conundrum: Can the state generate more revenue by growing the number of filers making over $500,000, or could it generate more revenue by raising taxes on the very richest? That is, if 1,217 filers generate 20.33 percent of the state’s income tax collections, wouldn’t the state be better off trying to get that number to 1,500, rather than squeeze another percentage out of them and risk chasing those rich filers into a more tax friendly state? Consider, also, that the very wealthy have mobility; they can choose where they want to live. Vermont has its charms and is very appealing, but no one likes to be taken to the cleaners. Create that image and you create a tax problem. On the other hand, make it appealing to live in Vermont and could taxes from that income group grow? It is a discussion that deserves serious study.

• The changing face of welfare:

The state’s Reach Up program serves 44,000 Vermonters. The state contributes $24 million, one of the most generous state subsidies on a per capita basis in the country. The governor has suggested the state subsidy, which has grown 48 percent in the past 8 years, is not sustainable and has suggested the program be restructured to generate better results.

The issue is not about cutting spending for the poor — although that is the headline many progressives are wrongly repeating. Rather, the story is about shifting $17 million from one low-income group to a subset within that group — families who need help with childcare. That accomplishes two primary objectives: it boosts early childhood education (something that everyone says is the most important action a state can take to improve education results in the long-term), and it frees the parents to get full-time jobs.

Opponents have done a good job of panning the idea based on a simplistic gut reaction: it’s a non-starter to finance additional subsidies for the poor by having the poor pay for it.

But pursue that thinking: it presumes all current programs that help the poor need no improvement; or that the only way to improve them is to keep existing programs, tax the rich, and add money to them. That’s insane, and inefficient. It makes good business sense to review, revise and prioritize spending to those areas that generate the most return for the investment. That should be the ongoing work of the Legislature.

Currently, the Reach Up program makes a one-time annual payment to recipients based on a family’s needs. If a family is good at budgeting, they may set aside so much for heat assistance, or childcare, or transportation, and the like. If they aren’t well organized, they’ll likely spend it in lump sums on things they need or want, including items that don’t improve their long-term finances. It’s a given that annual lump-sum payments are not the best way to allocate financial aid; better programs could be created.

Votes on this issue in key House committees have been close, with several items passing 6-5. With the Senate weighing in, finances tight and tax increases unpopular, common sense may yet prevail.